China China is no place for an investor

Opinion: More going wrong than going right for the country

JimLowell

New York (MarketWatch) — This April, in terms of regions and capitalization ranges, I’d consider trading up the quality chain and away from potential dungeons.

China was once the darling economy that could do no wrong — and no doubt it will be again and again.

But right now, I think China looks like it’s getting some overdue comeuppance that is more than mere momentum selling can account for.

It isn’t that China Inc. is destined to be the next Japan Inc. But that thought can’t be as easily dissed or dismissed.

Those of us who lived through the 1980s recall an idolization gone bust: Japan Inc. was the locus of envy and fear. From manufacturing to corporate culture, Japan set the paradigms. From the sale of Rockefeller Center to homespun movies like “Mr. Mom,” the only way to battle the forecast tides of Japan’s global takeover was through slapstick rather than inventiveness.

Back then, there was more than a sense of Japan’s dominance: it was a foregone conclusion based on the cozy relationship between governments and businesses which propelled a political and corporate cronyism that seemed unbeatable … their appetite for our Treasurys seemed destined to create a U.S. collapse if ever they began to sell. And then their bubble of non-marked-to-market real estate and keiretsu balance sheets burst.

Now China may not be on the verge of a Japan-like slide into an epic 20-year recession of its own real-estate and banking-bubble making. (A significant portion of Japan’s burden was its aging population who were not investors, but savers in the main.) But I would argue that China is now struggling with decelerating growth and trillions of dollars in municipal-bond-like debt that was generated to fabricate Detroit-quality cities overnight: Building infrastructure and housing to support whole populations who were drawn from sustenance-level agrarian villages to higher-paying jobs that are now going the way of a post-construction boom sets the stage for a post-construction bust.

Not only are whole buildings vacant, whole areas within cities and even whole newly formed cities are ghostly towns compared to the promise of their growth-oriented visage. But inside the walls, there are populations who became more dependent on government growing jobs for them than on their own self-reliance, more dependent on borrowing to afford what seemed like a better life.

In another way, China’s troubles are of its own making. There’s a secular trend known as “re-shoring” that began first by outsourcing everything to cheap labor China, and then, as China labor became less cheap, to its emerging Asian neighbors. Now, factoring in the costs of everything from transporting goods and services to the quality of those goods and services, to cost of skilled labor, our neighbors to the South are looking like a better bargain than those in the Far East.

Of course, it’s too early to say definitively that China’s growth is more like Japan Inc. than an early stage of American capitalism. But it isn’t too early to say that many of the gleaming, towering examples of China’s inevitable dominance look about as vacant as Potemkin villages.

Gone are the proliferation of politburo glam shots with gold-tipped shovels at the start of the construction boom. Now, facing a lot of empty buildings and cities with hundreds of millions of mouths that can no longer feed themselves, China may have the makings of more, rather than less, economic and social unrest. The politicians are shifting form signs of their own excess to more contrite and conservative lifestyle projections.

Now all this may sound like a dire forecast. Time will have to tell that tale. Here, it is important to note that while I often recommend short positions (typically using short or ultra short Proshares ETFS, and that ProShares has both with regard to China — and I have recommended them in the past), I am not making such a recommendation here.

Let me repeat: I am not recommending shorting China.

Instead, my April trade is more about a place to avoid based on the cost opportunity of what you might otherwise own. My view is that what you would want to own would have a dynamically different risk than anything to do with China.

My April trade would be into State Street SPDR Dow Diamonds
DIA, -0.30%
and the iShares 10-20-year Treasurys
TLH, +0.67%
: Battleship balance-sheet blue chips, not red chips, and a yen not for yuan, but for what undergirds the almighty dollar, should help you rule rather than rue April’s days.

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